WHERE THE BULLS ARE GLOATING (int'l edition)

Chinese and Latin American funds should continue to shine

For investors in offshore funds, the second quarter of 1997 was one exciting ride. BUSINESS WEEK's latest scoreboard of the world's 500 largest offshore equity funds shows just how exciting: Nearly half of the funds gained 10% or more, and returns of twice that much or even more were common (table). With profits and stock markets remaining strong in the Americas, Europe, and parts of Asia, there should be room for more fun.

Offshore funds are mutual funds or unit trusts that are not sold in the U.S. because their sponsors choose not to follow disclosure rules the Securities & Exchange Commission has laid down for funds traded domestically. While the U.S. stock market sizzled in the quarter, rising about 20%, some of the scoreboard's biggest gainers made their money on the other side of the Pacific.

To be sure, the economic and currency woes roiling Southeast Asia caused carnage among Malaysian, Philippine, Singaporean, and Thai funds. But falling interest rates in China and the handover of Hong Kong to Beijing at the quarter's end gave Chinese and Hong Kong funds a strong lift.

Among the best Asian performers were two GT Global funds--GT Hong Kong and GT PRC. While one focuses on the former British colony and the other on the mainland, each has invested heavily in the region's hottest play: ''red chips''--companies based in Hong Kong but controlled by Chinese state interests. Viewed as one of Beijing's primary tools for privatizing China's economy, red chips have taken off this year amid expectations--and hype--that their owners will shift cheap state industrial assets onto their balance sheets, shape them up, and make them pay off.

TRIED AND TRUE. The red-chip rally has been so robust, in fact, that Henry Chan, an analyst in Hong Kong for both funds, is becoming more choosy. ''It's time to sit down and figure out which of these companies can actually deliver good results,'' he says. For Chan, that means sticking to well-managed companies with strong support from their Chinese parents. Among his picks: Shanghai Industrial, a conglomerate which is trading at 35 times estimated 1997 earnings, and China Resources, a property group whose price-earnings ratio is 32.

While Hong Kong boomed, Taiwan funds turned in a healthy performance of their own as shares of electronics makers took off. But the big surprise of the quarter was the showing by Japan funds. In the previous quarter, many of them showed up in the scoreboard's bottom tier. This time around, they occupied 18 of the scoreboard's 25 top positions. Does that mean Tokyo's 7 1/2-year-old bear market is finally over? Not quite. The latest gains were ignited by a brief rally in the Nikkei stock average. Also helping the funds, whose results are reported in U.S. dollars, was a sudden drop in the greenback's value, from 125 to 110 yen.

Since then, the stock market and dollar have gone back to trading in a narrow range. Still, the spring rally has drawn the attention of some global investors to Japan for the first time in years. Warwick Johnson, head of equities at HSBC Asset Management Japan, is especially fond of small-capitalization issues, including Onward Kashiyama Co., a clothing manufacturer selling at 30 times earnings. But Vernon Winters, chief investment officer at Mellon Private Asset Management, is a fan on a broader scale. Arguing that earnings are rising, he maintains Japan is in the ''early stages of a bull market.''

There's no arguing about the bull market in Latin America, however. With Brazil's stock market up 28% in dollar terms for the quarter, Florian Bartunek (page 36), manager of Banco Pactual's Infinity and Eternity funds, zeroed in on Ericsson, an affiliate of the Swedish telecom-equipment maker, and the national phone company, Telebras. After the quarter's end, jitters over Southeast Asia's currency crisis spreading to Brazil sparked a sharp sell-off. But while Bartunek remains upbeat, other managers, including Jane Hakham of Chase Vista Latin American Equity, are looking elsewhere. Hakham is moving money into Mexican bank and construction issues and sees ''a little recovery in the consumer sector''--a possible boon for retailing stocks. With extremely low inflation, higher growth than expected, and a reasonable balance-of-payments situation, Argentina ''could be interesting,'' says Hakham. She notes that the Buenos Aires market is now being held back by uncertainty over congressional elections slated for October.

The granddaddy of all bull markets, of course, is the one on Wall Street. But even with many North America funds up sharply in the quarter, managers are still buying. Take Barbara Marcin, senior equity portfolio manager at Citibank. Among issues that paid off for her in the quarter were Lear Corp., which rose 33% amid increasing global demand for auto parts, and Twinlab Corp., a maker of nutritional supplements whose shares rocketed 78% on rising sales to Wal-Mart Stores Inc. and other U.S. chains. Marcin also is a fan of PepsiCo Inc., which is spinning off its restaurant unit, and McDonald's Corp. She notes that while traders have zeroed in on McDonald's competitive problems in the U.S., half of the chain's profits come from overseas, where it remains strong.

One result of America's bull market may give investors reason for concern: As capital has flooded into the U.S., the dollar has risen against many other currencies--especially those in Europe and Southeast Asia. Because the bulk of offshore funds are denominated in dollars, the greenback's advances are likely to wipe out some of the stock-market returns investors are scoring this summer. On the other hand, the cheaper currencies should translate into rising exports and better profits for many companies outside the U.S. Over time, that should be reflected in improved stock prices and some sizzle in offshore funds for yet another quarter.

By William Glasgall, with Kerry Capell, in New York and Dave Lindorff in Hong Kong